Peoplesoft May Be Due for a Hard Landing
Wall Street is still giving
PeopleSoft
(PSFT)
high-fives a month after the company announced strong third-quarter results and more than two months after it released a souped-up, Web-based software suite,
PeopleSoft 8
. The stock is up 52% since the Oct. 17 earnings announced and 133% for the year.
Most on the Street are so in love with the stock that they're ignoring the fact that it's now trading at a hefty 87 times projected 2001 earnings. Most, that is, except for Todd Bernier, an analyst at
Morningstar.com
, an independent financial analysis company. In a report last month, Bernier called PeopleSoft "too pricey to love."
PeopleSoft, of course, begs to differ. "We believe we're undervalued compared to our competitors," says spokesman Steve Swasey. "Our product is superior to theirs, it's the only pure Internet play and our pipeline is full."
A Very Good Year |
|
But Bernier's call eventually could become even more significant given the beating investors are laying on companies with high-priced stocks that disappoint. For instance,
Nortel
(NT)
, which had a
P/E above 60, fell 29% Oct. 25 after the company reported revenue from optical products that was below expectations.
TheStreet Recommends
On the Other Side
Bernier contradicts a slew of sell-side analysts who boosted their ratings on the stock after the earnings announcement, citing a promising business pipeline for PeopleSoft 8, the retooled flagship software.
Lehman Brothers
raised its rating to buy from outperform and
Credit Suisse First Boston
upgraded it to buy from hold. They followed similar actions by
Goldman Sachs
and
ING Barings
. (Lehman, CSFB, Goldman and ING Barings haven't done recent underwriting for PeopleSoft.)
And PeopleSoft has made great strides under Chief Executive Craig Conway, who has turned the company around, rebuilt its management team and trimmed excess spending while developing novel products. The company's strategy to move away from its human resources software base -- a shrinking market -- was lauded by the Street. In the third quarter, the company earned $23.4 million, or 8 cents a share, nearly five times the year-ago's $500,000, or break-even on a per-share basis. Revenue increased 28% to $443 million from $346 million.
But according to Bernier, the current price makes too much of the company's improving prospects.
For one thing, PeopleSoft is enjoying what's known in industry lingo as "an easy compare" because its year-ago numbers were weak. That'll end by the second quarter of 2001 because PeopleSoft's earnings began to grow substantially in this year's second quarter.
For another, its price-to-earnings ratio of 87 is well ahead of competitors
Oracle
(ORCL) - Get Oracle Corporation Report
at 52 times earnings for the year ending in May and
SAP
at 69 times 2001 projected earnings.
Too High?
The P/E is based on PeopleSoft earning 57 cents a share next year, based on the
First Call/Thomson Financial
consensus estimate, up 111% from this year's projected 27 cents a share.
Bernier questions whether PeopleSoft's respected management team can deliver that kind of growth. In the third quarter, license revenue doubled from last year to $132 million, almost half from new clients. (License revenue is the most accurate indicator of new business for software companies.) But it's still too early to tell if PeopleSoft's two-year, $500 million dollar bet on PeopleSoft 8, will pay off. The Web-based suite allows communication among customers, suppliers and employees. The company is introducing 60 new applications for the suite this year in areas such as customer management and supply-chain planning.
As popular as the new product may prove to be, competitors are more than eager to scrap for every bit of market share. If a software buyer chooses a so-called best-of-breed approach -- selecting the top product for each business function -- a competitor like customer relationship specialist
Siebel
(SEBL)
could easily outmaneuver PeopleSoft, says Bernier. If buyers move to the integrated package, or suite approach, Oracle is so ready to hook them in that the company is literally giving away its customer management software.
"If PeopleSoft's turnaround doesn't hold on, they're likely to be the next on the bidding block, probably to a company like Seibel or
i2
(ITWO)
," says Jeremy Burton, Oracle's senior vice president of product marketing.
Despite all this, PeopleSoft's stock keeps rising. On Tuesday, it was up $2.38, or 5%, to $49.69 a share, which to people like Bernier only makes it even more expensive.
